On-screen text:
Small business
- Top issue: Ifnlation
- Is disinflation stalling?
- CPI/PCE divergence
Narrator:
How is the inflation outlook going to impact small business confidence moving forward?
So, two big reports that we're looking at this week.
First one comes from the National Federation of Independent Businesses, which puts out a monthly survey of small companies asking them how they feel about their company's own trajectory, but also how they feel about the broader economy.
On-screen chart: NFIB Small Business Optimism Index from 2021 to 2026 with a index range from 86 to 106. The index was between 95 and 104 for 2021 and 2022, then fell between 92 and 88 in 2023 and 2024 before rising to 105 in 2025, and has since ranged between 101 and 96.
Narrator: Now, small business confidence has been shaky over the past several years, and they haven't really been responding to the fact that the stock market has been rising, and the fact that corporate profits for large caps have been rising to all-time highs.
And a lot of that is driven by the fact that inflation has hurt smaller companies a lot more versus larger companies.
And when the NFIB has asked small companies, what's your single most important problem?
On-screen chart: Single most important problem for small businesses, from highest to lowest percent: Inflation at 20, taxes and quality of labor at about 19, cost/availability of insurance and government regulation and cost of labor at about 7, competition from large business at 5, fin. And investment rates at 3, and other at 1.
Narrator: They have definitively said that it is inflation, above taxes, above the quality of labor.
So that gets us to the discussion around the Consumer Price Index that we get later this week.
You're expected to see a little bit of a bounce back in CPI, especially relative to June, because that was disproportionately driven by the decline in energy prices.
But really what we're looking for over the longer term is whether this progress towards disinflation has stalled or not.
And I think this is really important because when the Fed looks at inflation, they're not necessarily looking at CPI.
They're looking at their own preferred gauge, which is the Personal Consumption Expenditures price index.
You can see that there's been a divergence here between core PCE and core CPI.
On-screen chart: core CPI versus core PCE year over year between 2010 and 2026. From 2010 to 2020 both ranged between about 1 percent to 2 percent with CPI slightly higher than PCE. Both spiked after 2020: above 6 percent for CPI and about 5.5% for PCE. Both fell and PCE is currently higher than CPI, about 3.5% versus 2.75%, respectively.
Narrator: Not to say that we shouldn't focus on CPI this week, especially if it is a little bit cooler than expected.
That probably pushes back the timeline for Fed rate hikes. But at the same time, we need to focus on things like the Producer Price Index, which is out later this week as well, which is going to show us whether we get some more heat in PCE versus CPI.
This all feels very technical, but when you think about how the fed sets monetary policy, they do need to focus on what is their preferred gauge of inflation. If they do start to think about tightening policy and if inflation pressures remain broad, you probably don't have that pickup and small business confidence that we've been all looking for.